The Court of Appeal has reminded employers that lump sum payments made to employees on the transfer of a business can be subject to tax.
In Kuehne + Nagel Drinks Logistics Ltd, Stott and Joyce v HMRC [2012] EWCA Civ 34 the payments were made partly to compensate employees for the loss of pension rights, and partly as an incentive for employees to work willingly without pursuing industrial action as a result of the transfer.
In determining whether or not such payments are taxable, the question is whether they arose from the relevant employment. If a major reason for the payments being made is the individual's employment, as in this case, then the sums are taxable as employment earnings. This is despite there being a compensatory or other element involved. If a payment is made for two or more inseparable reasons, the full amount will be treated as employment income and taxed.
Best practice
Employers should be aware that there are only limited circumstances under which it will be possible to make a tax free payment to an employee and tax free payments made whilst the employment is continuing may be challenged by HMRC. Ideally, where payments are made for various reasons (some taxable and others not) those payments should be split out to protect the non taxable elements. The tax and NICs treatment can then reflect the nature of the payment.
For more information, please contact Richard Hewitt on 0117 314 5230.
This publication is for guidance only. Reliance should not be placed upon it and nor should action be taken, without obtaining advice in respect of the specific circumstances applicable. We will be pleased to provide such advice or assistance.
